RBA holds rates but with a loose grip

Peter Martin

THE Reserve Bank of Australia is fully prepared to cut interest rates at its next meeting on December 4, but the statement released after its Tuesday board meeting reveals that it'll be no pushover.

By keeping the official cash rate on hold at 3.25 per cent, the central bank went out of its way to describe interest rates for borrowers as "clearly" below their medium-term averages. The bank subscribes to a notion made popular by its previous governor Ian Macfarlane that the further rates move from neutral the stronger the case that needs to be made to move them further away still.

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The RBA would like to crimp the dollar, which it thinks is "higher than might have been expected".

The central bank sees signs that the five cuts it has delivered since Melbourne Cup day 2011 are "starting" to have the desired effects. Business demand for funding is up, housing is stronger and share prices have climbed in line with markets overseas. It is looking for "further effects" over time. If it gets them and if they are strong enough, it might feel the economy doesn't need another interest rate boost.

The RBA would like to see a clear case for a cut before cutting again - clearer than it needed in order to begin to cut. It is somewhat concerned about inflation (which has been "slightly higher" than expected) but not concerned enough to rule out another rate cut and, importantly, not concerned enough to make it delay any rate cut after the release of the next consumer price index figures in late January.

The RBA board believes that by its next meeting in December it will get a good enough steer on inflation from the wage price index, due for release next Wednesday.

It will also have the latest figures on investment intentions, something to which it is now paying very close attention as it worries about the transition from mining investment to other forms of investment after the boom peaks some time next year.

Late Tuesday the market was assigning a 58 per cent probability to a rate cut in December, which is probably about right.

The RBA is worried about unemployment edging higher (although it recognises this will help control inflation) and it believes some of the jump in consumer spending in the first half of the year was only temporary, created by early carbon tax compensation payments.

It is now ''leaning against the wind'' by selling Australian dollars where foreign customers want to buy them, but it doesn't want to cut rates in order to restrain the dollar because it fears it mightn't work. It'll cut rates only if the case stacks up on its own terms, which isn't yet.

The RBA said a rise in inflation during the September quarter, in part due to the introduction of the carbon tax, was one of the factors in yesterday's decision.

''The introduction of the carbon price affected consumer prices in the September quarter, and there could be some further small effects over the next couple of quarters,'' said RBA governor Glenn Stevens in the accompanying statement.

''With prices data slightly higher than expected and recent information on the world economy slightly more positive, the board judged that the stance of monetary policy was appropriate for the time being.''

HSBC Australia chief economist Paul Bloxham said Tuesday's statement suggested the RBA may not be keen to cut much further.

''We could be nearing the end of this easing cycle,'' he said.

The RBA has cut the cash rate 1.5 per cent since November 2011, with its most recent reduction of a quarter of a percentage point in October 2012.

Rates Reaction

''They seem to be saying the world is a bit better, inflation is a bit higher and growth is around trend. I expect the RBA is going to sit and wait for a little while. I still think they have one more cut to come.''

National Australia Bank chief economist Alan Oster

''The RBA wants to keep some bullets in the gun. If they cut too aggressively and things start to deteriorate, then you have the same situation as you have [overseas], where central banks have cut rates so much that monetary policy has become a blunt instrument.''

Rochford Capital managing director Thomas Averill

''They [the RBA] are looking at how their past decisions are flowing into the data, which suggests they will be somewhat gradual with their decision-making. Reading between the lines, it looks like if they don't get signs that [things] are picking up, then they would be prepared to ease some more. But that would probably be later next year.''

ANZ head of economic research Ivan Colhoun

''Given the waning effect of the exchange rate on pushing down trade prices … we could be nearing the end of this rate-cutting cycle. For now, we have in mind one more cut, but only just.''

HSBC chief economist Paul Bloxham

''Employment growth is slow, retail sales growth remains weak in real terms and the strong dollar is a major impediment to businesses competing with imports or selling into export markets. We would hope to see interest rates fall before Christmas in an effort to lift domestic activity and take some pressure off the stubbornly high exchange rate.''